impact of foreign capital inflows on indian stock market

<ul><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>79 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>IMPACT OF FOREIGN CAPITAL INFLOWS ON INDIAN STOCK </p><p>MARKET </p><p>Santosh Chauhan* </p><p>*Geeta Institute of Management and Technology, </p><p>Kanipla, kurukshetra, India. </p><p>ABSTRACT </p><p>India has emerged as one of the most favoured destinations for global </p><p>investments. This is reflected in the number of foreign institutional investors </p><p>(FIIs) and foreign portfolio investors (FPIs) registered with SEBI and number of </p><p>foreign direct investors (FDI) in India. The dawn of 21st century has shown the </p><p>real dynamism of stock market and the various benchmarking of sensitivity index </p><p>(Sensex) and Nifty in terms of its highest peaks and sudden falls. There has been </p><p>growing presence of FDI, FIIs, and FPIs in Indian stock market evidenced by </p><p>increase in their net cumulative investments and they have significant impact on </p><p>the Indian Stock Market. </p><p>Foreign investors seem to have embraced Indian stocks yet again with net inflows </p><p>crossing Rs. 1.2 lakh crore ($23 billion) in 2012 and taking their total cumulative </p><p>investment in the country's equity market to an all-time high of $125 billion. The </p><p>net inflow of Rs. 1.23 lakh crore during 2012 is the second-highest for a year and </p><p>comes after a net outflow in the previous year 2011preparing the ground for </p><p>even better times ahead in 2013 on the back of continuing reform-push by the </p><p>government and market regulator SEBI. At gross level, Foreign Institutional </p><p>Investors (FIIs) purchased stocks worth about Rs. 6.5 lakh crore in 2012 and sold </p><p>equities to the tune of Rs. 5.3 lakh crore translating into a net inflow of Rs. </p><p>1,21,652 crore ($23 billion). This was the second highest net inflow by FIIs in a </p><p>single calendar year since their entry into Indian capital markets in 1992. In </p><p>2010, overseas investors had made a record Rs. 1.33 lakh crore ($29 billion) net </p><p>investment into the share market. However, FIIs had pulled out a net Rs. 2,714 </p><p>crore ($358 million) from the share market in 2011.Despite their unpredictable </p><p>'hot money' investment, these overseas entities have been amongst the most </p><p>important drivers of Indian stock markets. </p><p>The present research paper is an attempt to find out the impacts of FDI (Foreign </p><p>Direct investment), FIIs (Foreign Institutional Investment), and FPIs (Foreign </p><p>Portfolio investment) inflows on the movement of BSE (Bombay Stock Exchange) </p><p>and NSE (National stock exchange) during period under study. The study is </p><p>purely based on secondary data which were analyzed through Regression (OLS </p><p>Model), Karl Pearsons correlation, Analysis of Variance, etc., and found that </p><p>FDI affects the most both Sensex and Nifty up to 61 per cent and 86 per cent </p><p>respectively and is associated highly and positively with both the markets with a </p><p>score of 0.78 and 0.92 respectively according to the Karl Pearsons coefficient of </p><p>correlation. However, the FPIs showed a very low impact on Sensex and a </p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>80 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>comparative high impact on NSE. During the study period the least significant </p><p>factor with lowest impact on senex and nifty was FIIs. </p><p>KEYWORDS: FDI, FIIs, FPIs, BSE Sensex, NSE Nifty, Indian Stock Market. </p><p>_________________________________________________________________________ </p><p>INTRODUCTION </p><p>The global economy is passing through a phase of uncertainties after the outbreak of </p><p>economic slowdown from US in last quarter of 2007. The economy and economic </p><p>development of a nation largely depends on the efficient and effective financial system of that </p><p>nation which acts as its nerve system. With the inception of globalization, financial markets </p><p>have become more important now a days. A developed stock market has become very crucial </p><p>to national economic growth by providing additional channel along with banks and other </p><p>financial institutions, for encouraging and thus mobilizing domestic savings. It also ensures </p><p>improvements in the productivity of investment through market allocation of capital and </p><p>increases managerial discipline through the market for corporate control. A study by World </p><p>Institute for Development Economic Research (WIDER, 1990) argued that the developing </p><p>countries should liberalize their financial markets in order to attract foreign portfolio equity </p><p>flow. The Indian government opened the gates for foreign individual investors to invest </p><p>directly into Indian stock markets accordingly. There is no doubt that India as a preferred </p><p>investment destination is gaining more and more acceptance with each passing day. India is </p><p>now seeing inflows from all corners of the globe, be it global macro funds, hedge funds or </p><p>exchange-traded funds. The European Union's Institute for Security Studies (EUISS) ranking </p><p>India as the third most powerful country in the world after the US and China and the fourth </p><p>most powerful bloc after the US, China and the European Union. </p><p>Existing studies reveals that the huge surge in international capital flows since early 1990s </p><p>has created unprecedented opportunities for the developing countries like India to achieve </p><p>accelerated economic growth. International financial institutions routinely advise developing </p><p>countries to adopt policy regimes that encourage capital inflows(Singh, Sumanjeet, 2013). </p><p>The dawn of 21st century has shown the real dynamism of stock market and the various </p><p>benchmarking of sensitivity index (Sensex) and Nifty in terms of its highest peaks and </p><p>sudden falls. There has been growing presence of FDI, FIIs, and FPIs in Indian stock market </p><p>evidenced by increase in their net cumulative investments. The FIIs activity and effects on </p><p>Indian Capital Market are significantly and positively correlated. The FDI and FIIs are strong </p><p>forces driving the Indian Stock Market which is evident from top twenty five crashes at BSE </p><p>SENSEX as FIIs were the net sellers in all the leading market crashes. Flow of FDIs and FIIs </p><p>in India determines the trend of Indian stock market. Indian stock market and FIIs influence </p><p>each other; however, their timing of influence is different (Loomba, Jatinder, 2012, </p><p>Rukhsana, et.al., 2009, and Gupta, Ambuj, 2011), FII flows were caused by rather than </p><p>causing the national stock market returns (Chakraborty, Tanupa, 2007). FIIs were </p><p>influencing the Sensex movement up to a greater extent. Sensex increased when there were </p><p>positive inflows of FIIs and decreased due to theirs negative inflows (Jain et.al. 2012). The </p><p>average returns of Indian stock market and volatility declined significantly after the entry of </p><p>FIIs except in the financial year 2005 and 2006 (Bansal, Anand and Pasricha, J.S., 2009, </p><p>Bohra, Narendra Singh and Dutt, Akash, 2011), FIIs play a very important role in building up </p><p>Indias forex reserves, by making investments despite sluggish domestic sentiment and </p><p>contributes towards economic growth (Stanley Morgan, 2002). The Rapid growth in the flow </p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>81 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>of the foreign portfolio investments is leading to greater integration of the Indian equity </p><p>market with the main developed markets and this may have significant implications for asset </p><p>pricing and international portfolio diversification benefits (Poshakwale, Sunil and Thapa, </p><p>Chandra, 2007). </p><p>OBJECTIVES </p><p>The objectives of the study are; </p><p>(1) To study the trends of FDI, FIIs, and FPIs inflows during the period under study, </p><p>(2) To assess the impact of FDI, FIIs, and FPIs inflows on the movements Indian stock Market. </p><p>HYPOTHESES </p><p>H01: The impact of FDI inflows on the movements of Sensex and Nifty are statistically </p><p>insignificant. </p><p>H02: The impact of FIIs inflows on the movements of Sensex and Nifty are statistically </p><p>insignificant. </p><p>H03: The impact of FPIs inflows on the movements of Sensex and Nifty are statistically </p><p>insignificant. </p><p>RESEARCH METHODOLOGY </p><p>The following research methodology is followed in the present study to achieve the </p><p>objectives of the study: </p><p>DATA COLLECTION </p><p>The study is purely based on secondary data relating to FDI, FIIs, and FPIs inflows during </p><p>12 years commencing from 2000-01 to 2011-12 and also the data related to Sensex and Nifty </p><p>during the corresponding period. The data related to FDI, FIIs, and FPIs inflows have been </p><p>collected from various sources like Bulletins of Reserve Bank of India, Fact sheets of DIPP, </p><p>Govt. of India. The BSE Sensex and CNX Nifty data have been taken from the websites of </p><p>bseindia and nseindia respectively. </p><p>ANALYTICAL TOOLS &amp; TECHNIQUE </p><p>The collected data have been analyzed with the help of the statistical tools such as correlation </p><p>and linear regression (OLS model). The correlation is applied to study the linear relationship </p><p>between variables such as FDI &amp; FIIs, and FPIs and Sensex &amp; Nifty while, the linear multiple </p><p>regression analysis is used to evaluate the effects of two or more independent variables on a </p><p>single dependent variable. </p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>82 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>The two model equations are expressed below: </p><p>BSE Sensex= a + b1 (FDI) + b2 (FII) +b3 (FPI) (i) </p><p>CNX Nifty = a + b1 (FDI) + b2 (FII) + b3 (FPI) (ii) </p><p>RESULTS AND INTERPRETATION </p><p>It is also clear from the analytical Table 1 and that the inflows of FDI in India have been </p><p>greater than mean score ($ 21103.25 US million) form the year 2006-07 to 2011-12, while </p><p>they have been significantly low during the preceding years i.e. 2000-01 to 2005-06. The </p><p>flow of FIIs have been very low during 1st three years under study and jumped sharply in the </p><p>year 2003-04 to $ 10918US million which was more than the mean inflows of FIIs ($ 97565 </p><p>US million) for all the years under study taken together. The inflows again declined below </p><p>average during next two years and went down substantially 2006-07. During the year 2007-</p><p>08 a sudden big high rise was observed in the inflows of FIIs (more than double the mean </p><p>score) but unexpectedly it contracted to $ -15017 US million during 2008-09 due to the </p><p>recession which broke out in US economy; but after that the inflows have been high and </p><p>positive especially during 2009-10 to 2010-11. The trends of FPIs during the period under </p><p>study are similar. </p><p>TABLE 1: INFLOWS OF FDI, FIIS, FPIS AND MOVEMENTS OF INDIAN SHARE </p><p>MARKET (AMOUNT IN US $ MILLION) </p><p>Financial </p><p>Year </p><p>FDI FIIs FPIs Sensex CNX Nifty </p><p>2000-2001 4029 1847 2760 3262.33 1334.76 </p><p>2001-2002 6130 </p><p>(52.14) </p><p>1505 </p><p>(-18.51) </p><p>2021 </p><p>(-26.77) </p><p>3377.28 </p><p>(3.52) </p><p>1077.02 </p><p>(-19.30) </p><p>2002-2003 5035 </p><p>(-17.86) </p><p>377 </p><p>(-74.95) </p><p>979 </p><p>(-51.55) </p><p>5838.96 </p><p>(72.88) </p><p>1037.22 </p><p>(-3.69) </p><p>2003-2004 4322 </p><p>(-14.16) </p><p>10918 </p><p>(2796.02) </p><p>11377 </p><p>(1062.10) </p><p>6602.69 </p><p>(13.07) </p><p>1427.50 </p><p>(37.62) </p><p>2004-2005 6051 </p><p>(40) </p><p>8686 </p><p>(-20.44) </p><p>9315 </p><p>(-18.12) </p><p>9397.93 </p><p>(42.33) </p><p>1805.26 </p><p>(26.46) </p><p>2005-2006 8961 </p><p>(48.09) </p><p>9926 </p><p>(14.27) </p><p>12492 </p><p>(34.10) </p><p>13786.91 </p><p>(46.70) </p><p>2513.44 </p><p>(39.22) </p><p>2006-2007 22826 3225 7003 20286.99 3572.44 </p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>83 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>(154.72) (-67.50) (-43.94) (47.14) (42.13) </p><p>2007-2008 34835 </p><p>(52.61) </p><p>20328 </p><p>(530.32) </p><p>27271 </p><p>(289.4) </p><p>9647.31 </p><p>(-52.44) </p><p>4896.59 </p><p>(37.06) </p><p>2008-2009 41874 </p><p>(20.20) </p><p>-15017 </p><p>(-173.87) </p><p>-13855 </p><p>(-150.80) </p><p>17464.81 </p><p>(81.03) </p><p>3731.02 </p><p>(-23.80) </p><p>2009-2010 37745 </p><p>(-9.86) </p><p>29048 </p><p>(-293.43) </p><p>32396 </p><p>(34.10) </p><p>20509.09 </p><p>(17.43) </p><p>4657.76 </p><p>(24.83) </p><p>2010-2011 34875 </p><p>(-7.60) </p><p>29422 </p><p>(1.287) </p><p>30292 </p><p>(-43.94) </p><p>15454.92 </p><p>(-24.64) </p><p>5583.54 </p><p>(19.87) </p><p>2011-2012 46556 </p><p>(33.49) </p><p>16813 </p><p>(-42.85) </p><p>17171 </p><p>(289.41) </p><p>18842.08 </p><p>(21.91) </p><p>5296 </p><p>(-5.14) </p><p>Total 253239 117078 139222 144471 36932.55 </p><p>Mean 21103.25 9756.5 11601.833 12039.28 3077.713 </p><p>S.D. 16967.71 12784.85 13538.98 6487.48 1746.20 </p><p>Source: Bulletins of Reserve Bank of India, Fact sheets of DIPP, Govt. of India. </p><p>Note: Figures in parenthesis are percentage change </p><p>The Figure 1 and 2 depict the impact of FDI, FIIs and FPIs on the movement of BSE Sensex </p><p>and CNX Nifty. From the figures, it is clear that the impact of FDI on Sensex and Nifty is </p><p>much higher as compared to FIIs and FPIs. The trends of BSE Sensex and CNX Nifty move </p><p>up with increased in FDI and goes down with fall in FDI. </p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>84 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>FIGURE 1: INFLOWS OF FDI, FIIS, FPIS AND MOVEMENTS OF BSE SENSEX </p><p>Source: Bulletins of Reserve Bank of India, Fact sheets of DIPP, Govt. of India </p><p>FIGURE 2: INFLOWS OF FDI, FIIS, FPIS AND MOVEMENTS OF CNX NIFTY </p><p>Source: Bulletins of Reserve Bank of India, Fact sheets of DIPP, Govt. of India. </p><p>In the present study correlation is applied to study the statistical relationship of the variables </p><p>FDI, FII, FPIs, and BSE Sensex and CNX Nifty on 12 years data. The following table 2 </p><p>presents the coefficients of correlation. The table showed that FDI was found to be highly and </p><p>positively correlated with BSE (0.780) and NSE (0.929); FIIs were having a low positive </p><p>correlation with BSE (0.286) and a moderate positive correlation with NSE (0.586); and FPIs </p><p>were also having a low moderate positive correlation with BSE (0.310) and NSE (0.618) </p><p>respectively. </p><p>-20000</p><p>-10000</p><p>0</p><p>10000</p><p>20000</p><p>30000</p><p>40000</p><p>50000</p><p>US$Million</p><p>FDI FIIs FPIs Sensex</p><p>-20000</p><p>-10000</p><p>0</p><p>10000</p><p>20000</p><p>30000</p><p>40000</p><p>50000</p><p>US$Million</p><p>FDI FIIs FPIs CNX Nifty</p></li><li><p>TRANS Asian Research Journals http://www.tarj.in </p><p>85 </p><p>A Publication of TRANS Asian Research Journals </p><p>TAJMMR TRANS Asian Journal of Marketing &amp; Management Research </p><p>Vol.2 Issue 3-4, March-April 2013, ISSN 2279-0667 </p><p>TABLE 2: CORRELATION COEFFICIENTS </p><p> FDI (US </p><p>$ million) </p><p>FII (US $ </p><p>million) </p><p>FPI (US $ </p><p>million) BSE Sensex NSE Nifty </p><p>FDI (US $ million) 1 .333 .363 .780**</p><p> .929**</p><p>FII (US $ million) .333 1 .990**</p><p> .286 .586 </p><p>FPI (US $ million) .363 .990**</p><p> 1 .310 .618 </p><p>**. Correlation is significant at the 0.01 level (2-tailed). </p><p>When the collected data (2000-01 to 2011-12) regarding FDI, FIIs, and FPIs were analysed </p><p>with the help of Simple Regression Method (Ordinary Least Square Method) to see their </p><p>impact on Sensex and Nifty, it was found that FDI was a very significant factor aff...</p></li></ul>